Overview of Venture Capital Tax Relief Schemes

If you're looking to raise money for your growing business, venture capital tax relief schemes can make your company more attractive to investors by offering them generous tax breaks. There are three main schemes — the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCT) — each designed to help small and medium-sized companies access investment. Understanding which scheme suits your business can help you raise funds more effectively.

How venture capital schemes work

Venture capital schemes encourage individuals to invest in smaller, unlisted companies by offering tax reliefs when they buy and hold new shares for a specific period. The company seeking investment, the investor, and the proposed investment must all meet specific conditions for whichever scheme you choose.

You can ask HMRC for advance assurance before you formally apply. This means HMRC will review your proposal and confirm whether it's likely to qualify, though you should check the scheme conditions first. Bear in mind that advance assurance only confirms certain conditions are met based on the information you provide — it's not a general endorsement or a prediction of investment performance.

Basic eligibility requirements

To use any of these schemes, your company must:

• Have a permanent establishment in the UK
• Carry out a qualifying trade
• Plan to spend the investment on that qualifying trade
• Not be listed on a recognised stock exchange at the time of investment
• Not be controlled by another company

You'll also need to meet the specific conditions of whichever scheme you choose.

Qualifying trades

Most trades qualify, including research and development that will lead to a qualifying trade. However, your company may not qualify if more than 20% of your trade involves certain activities, including:

• Coal or steel production
• Farming or market gardening
• Leasing activities
• Legal or financial services
• Property development
• Running hotels or nursing homes
• Energy generation (electricity, heat, gas, or other fuels)
• Exporting electricity
• Banking, insurance, debt, or financing services

How much you can raise

There's no minimum amount you must raise, but there are maximum lifetime limits depending on which scheme you use:

• SEIS: £250,000 maximum
• EIS and VCT: £24 million maximum

Some companies carrying out research, development, or innovation may be able to raise more if they meet certain conditions. Special rules also apply to companies based in Northern Ireland that trade in goods or wholesale electricity.

The Enterprise Investment Scheme (EIS)

EIS is designed for companies that have been trading for a few years and need investment to grow. Your company (or group of companies if you're a parent company) may qualify if, at the time of investment, it has:

• Fewer than 250 employees
• Been no more than 7 years since its first commercial sale
• No more than £30 million in gross assets (£15 million for specified companies)

Higher limits may apply if your company carries out research, development, or innovation and meets certain conditions.

Tax reliefs for EIS investors

EIS offers generous tax breaks to investors:

• Income Tax relief: 30% relief on investments up to £1 million per year (or £2 million if at least £1 million is invested in knowledge-intensive companies)
• Capital Gains Tax deferral: Investors can defer 100% of a capital gain if they reinvest it through EIS
• Capital Gains Tax exemption: Any gains made when selling EIS shares are exempt from Capital Gains Tax if the investor received Income Tax relief
• Loss relief: Capital losses can be set against income

Investors can claim relief in the tax year they invest or choose to treat the investment as made in the previous tax year.

The Seed Enterprise Investment Scheme (SEIS)

SEIS is aimed at very early-stage companies. Your company (or group of companies if you're a parent company) may qualify if it is less than 3 years old and, at the time of investment, has:

• No more than £350,000 in gross assets
• Fewer than 25 employees
• Not previously carried out a different trade

You cannot use SEIS if you've already had investment through EIS or a VCT.

Tax reliefs for SEIS investors

SEIS offers the most generous Income Tax relief:

• Income Tax relief: 50% relief on investments up to £200,000 per year
• Capital Gains Tax exemption: 50% of the investment (capped at £100,000) is exempt from Capital Gains Tax on gains reinvested through SEIS
• Capital Gains Tax exemption on disposal: Any gains made when selling SEIS shares are exempt from Capital Gains Tax if the investor received Income Tax relief
• Loss relief: Capital losses can be set against income

Like EIS, investors can claim relief in the tax year they invest or the previous tax year.

Venture Capital Trusts (VCT)

A Venture Capital Trust is a company approved by HMRC that invests in, or lends money to, unlisted companies. Rather than investing directly in your business, investors buy shares in the VCT, which then invests in multiple qualifying companies including potentially yours.

A VCT may invest in your company if it has:

• No more than £30 million in gross assets (£15 million for specified companies)
• Fewer than 250 employees
• Not been more than 7 years since its first commercial sale

Higher limits may apply for companies carrying out research, development, or innovation.

Tax reliefs for VCT investors

VCT investors (who must be over 18 years old) receive:

• Income Tax relief: 30% relief on investments up to £200,000 per year
• Tax-free dividends: No Income Tax on dividends from VCT shares
• Capital Gains Tax exemption: Gains from selling VCT shares are exempt from Capital Gains Tax

VCT investors can only claim relief in the tax year they invest (not the previous year like EIS and SEIS).

Social Investment Tax Relief (SITR)

Social Investment Tax Relief was designed to encourage investment in social enterprises, but this scheme closed to new investments on 6 April 2023. No new investments can claim SITR relief from that date onwards.

The application process

Even if you receive advance assurance from HMRC, you must complete a compliance statement (form SEIS1 or EIS1) after you receive the investment. This confirms your company has met all the scheme conditions and will continue to do so for the next 3 years.

HMRC will review your compliance statement and, if satisfied, will issue form SEIS2 or EIS2 containing a Unique Investment Reference number. This authorises you to issue compliance certificates (form SEIS3 or EIS3) to your investors. Investors need these certificates to claim their tax reliefs.

Combining schemes and holding periods

Investors can invest in different companies through different schemes in the same tax year, as long as they stay within the annual limits for each scheme. They must hold the shares for a minimum period (usually 3 years) to keep the tax reliefs.

Sources

• Use a venture capital scheme to raise money for your company
• Tax relief for investors using venture capital schemes

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.